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American Electric Earnings: The Long And Short

Regulations hit hard, but transmission could pull profits.

American Electric Power(NYSE:AEP) reported earnings last week, satisfying Mr. Market's revenue expectations and beating earnings estimates. But this utility still has some serious work to keep itself competitive. Let's take a look at this quarter's earnings, long-term trends and company qualities, and decide whether 2013 is the year to add American Electric to your portfolio.

Number crunchingAmerican pulled in $3.6 billion in sales for Q4 2012, matching analyst estimates. In a rare trend for this quarter, the utility's fourth quarter for 2012 also represented a slight gain over Q4 2011's $3.4 billion .

Even more important, the company turned revenue into profit at an unexpectedly high rate. American beat Mr. Market's expectations by 8%, pulling in $0.50 diluted EPS for Q4 2012. After missing on Q3 2012 and barely squeaking by in Q4 2011, this newest quarter is good news for the company's on-again, off-again earnings reports .

For 2012 overall, American's financials mirror a sectorwide trend of falling sales. The utility whiffed on revenue by 4%, but managed to keep its bottom line at $3.09 diluted EPS, 1.6% above expectations .

2012 and beyondAmerican Electric is one of the largest utilities around, with a generating capacity of 38,000 MW and more than 5 million customers across 11 states .

On the generation front, 63% of its capacity comes from coal. Historically, the company's 7,600 railcars, 630 barges, and 18 million ton capacity handling terminal have helped American keep costs low , but cheap natural gas and a potentially tough regulatory environment could turn coal into a defunct energy source.

American Electric is in the process of retiring coal facilities and increasing its natural gas offerings, but will spend around $5 billion more to keep itself competitive .

Source: American Energy Q4 Earnings Presentation.

In the world of regulated utilities, American had a rough year. After receiving approval for a rate increase from the Public Utilities Commission of Ohio in Dec. 2011, the commission reversed its decision in the face of public outcry . To add insult to injury, FirstEnergy(NYSE:FE) got the go-ahead to offer discounted long-term contracts to American's Ohio customers . In 2015, Ohio utilities will be fully unregulated, opening the door for more competition and price volatility .

But there's a hidden gem in American's offerings. In the words of CEO Nicholas Akins, "You look at the transmission growth, it's phenomenal... I think when you look at this business for the future, when you're retiring generation, when you're thinking about new sources of renewable energy and so forth, transmission will be key to that, robust transmission, and it certainly is a compelling growth engine for this company." Putting the blinders on and ignoring the company's generation and regulated utilities would be a mistake, but I admire American's ability to play to its strong point. With 39,000 miles of electricity transmission and $1.7 billion of new investment in 2012 , the company is pushing hard to grow this business.

American for the win?American's future is not without its obstacles. A coal-centric generation portfolio and hostile regulatory environment have hindered this utility's growth, but its strategic transition should set itself up for a more profitable future. If American can quit its old energy habits, weather the Ohio regulatory storm, and focus on growing its transmission division, its healthy balance sheet should pull the company through to some serious competitiveness.

Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.